When Apple went public, it was a big, newsworthy event, not just because Massachusetts state law made it illegal to take companies public with a P/E over 20 there, but also because it was such a big company—with a market cap of $1.8bn, equivalent to $7-8bn today, and much larger than the companies that typically went public. Intel had IPOed with a $60m market cap, and a few years after Apple, Oracle would go public worth $270m; Microsoft, with an $800m initial market cap, was the IPO of the year. This year, SpaceX went public at a market cap of over a trillion dollars, and Anthropic and OpenAI will plausibly come out worth over a trillion, too. In theory, someone could have bought Microsoft stock at the IPO and made a 633,500% return from holding and reinvesting the dividends. For someone to get the same kind of return from the current crop, they would have had to get in very early&dmash;in fact, for both OpenAI and Anthropic, their initial pre-money valuations were already in the hundreds of millions. If you want to get in on the ground floor, you'd better find a retired payments startup founder who's decided to go to Mars when he isn't busy decarbonizing American commutes.

The usual shorthand explanation for this is simple: in the late 90s, we performed a big national experiment on whether or not it was a good idea for public markets, including retail investors, to underwrite early-stage companies that were still net consumers of cash, and to fund them based on their growth prospects and future profitability. And what we found out was that the part where growth (and certainly profitability) happens did not play out as planned, though the part about only consuming cash mostly did. Sarbanes-Oxley was actually not crafted as a solution to that—it was a reaction to accounting scandals at companies that generally started shading the truth or outright cooking the books long after they'd gone public—but it happened in the aftermath of a time when many investors had lost their shirts buying tiny companies before the IPO. So, when the negative side effect of stricter rules about corporate disclosure was that a higher price for going public would encourage companies to stay private, this wasn't seen as a big deal.

But it meant that for those hypothetical future Intels, Oracles, and Microsofts, the reward to going public was smaller. And they had other reasons to stay private: what public investors were doing in 1999 was what VCs had specialized in before: backing companies that didn't have GAAP earnings, or that didn't produce enough cash to grow as fast as was optimal for them. This is a very fraught business, because plenty of money-losing companies can make a compelling argument that giving them a little more capital would fix their problems. That's perfectly fine if investors know what they're getting into, but it creates a kind of adverse selection that you don't see with more mature companies. It's just a lot easier to tell a good story about burning money than it is to actually make money, and market valuations will necessarily reflect that.

Another feature of this situation is that venture used to be a more obscure asset class that simply didn't have the financial firepower to support companies as their capital needs grew. For a while, venture was growing as an asset class because there were more companies that looked venture-fundable—the development of the microchip unlocked a surprising number of capital-light businesses, and software created still more. But after a while, these funds could make the same contemporary observation that we're making in retrospect: wouldn't it have been nice if Oracle had, instead of going public, raised another round and let VCs enjoy that appreciation instead of public shareholders? If you take public money, you're signing up for a continuous investor relations task; venture capital means doing your investor relations in short bursts, with shareholders who have no choice but to stick around, and who hopefully have some kind of expertise in the business.

Once this started happening, it developed momentum. The funds that came from a growth investing lineage realized that if they were going to keep investing in the kinds of businesses they liked, they want to do it with private companies (and that they could offer a compelling value proposition: they'd mostly leave those companies alone, but also give them some useful competitive benchmarks).

Public markets are still the natural destination for sufficiently big companies; venture funds and crossover vehicles still have an expiration date, and their investors expect the asset they own to be converted into cash at some point. But in the meantime, they're often the natural holders for companies that don't want to spend their time helping analysts parse through the nuances of quarterly guidance.

It used to be that public markets were best for companies of a certain size, but it's more accurate to say that they work for companies of a particular stage: the point at which they don't meet a VC's investment mandate, which is coincidentally close to when they can start raising capital. The real question to ask is why Anthropic and OpenAI still have to go public—they're both young enough that there isn't a pressing need for their investors to hit a capital return deadline. But despite all these market evolutions, equity markets do have one advantage: they're so big that at some point, even if OpenAI would prefer to wait until it has a cleaner story and a $2tr valuation, and even though Anthropic would prefer not to deal with public company pressures while trying to solve alignment and keep from getting banned by the White House, there are some fundraising needs that only a modern American stock exchange can meet. ¹

We've looked at IPOs many times in The Diff: knowing who's going public and why tells you something about sentiment, but it's also a good way to learn more economic fundamentals by diving into a challenging business. Some greatest hits:

• Steinway ($).

• Thoughts on the OpenAI IPO, and whether or not they can pull it off given how chaotic their business is right now ($).

• Why low-priced IPOs are uniquely bad ($).

• Thoughts on whether or not some of the late-but-not-public growth companies should stay private ($).

• And: the market in executive talent used to be much less efficient, so small, cheap public companies are likely to be that way for a reason.

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1  The less charitable take would be that investors think the frontier lab story is approaching a near term inflection, and that it would be prudent to take some chips off the table at the top.